No life-line for the ‘once’ mighty dollar!

Are we witnessing the beginning of a fundamental shift out of US denominated asset classes in fear that the States will loose its AAA rating from S&P? Or is a genuine fear of inflation? Bond yields and gold prices indicate that it may accelerate with the US budget deficit widening. Whatever the reason, no one wants the greenback! These are good reason to want to sell the currency. Surprisingly the ECB is the banker with the most credibility and that’s why investors are willing to sell ‘printer currencies’.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

US initial claims are now becoming a weekly consistent headline print in a tight range. Yesterday’s +631k remains within the confines of April’s early print. However, continuing claims has hit another all-time record high (+6.66m) and it’s a fair assumption that further records lie ahead, bringing with it the +10% unemployment print (mid-summer). Digging deeper, one notices that initial claims fell -12k w/w, this on the back of last week’s reading being revised higher (+643k vs. +637k). Continuing claims were also revised higher (+6.587m vs. +6.56m). Market opinion expects initial claims to remain elevated on deeper layoffs in the auto industry over the coming months.

The market had expected the Philly Fed manufacturing index to improve (-22.6 vs. -24.4), however the improvement was a disappointment. Most of the ‘modest’ improvement was driven by current shipments which slowed the pace of contraction compared to the previous month. The sub-components showed that prices paid and received still fell sharply but at a slower pace than last month. Its worth noting that the fact that ‘new’ orders deteriorated means we can expect continued downside pressure to future readings. Analyst’s believe the region’s manufacturing sector will not be immune to the shut downs in the auto-sector.

On a more positive note, leading indicators rose more than anticipated last month (+1.0% vs. -0.2%-the biggest gain in 4-years), a potentially positive sign that the deepest recession in over 50-years may be easing. Stronger global equities and improving consumer confidence are two of the variables that endorse speculation that the US economy may see signs of growth by year end. The fundamental facts of high unemployment and an ongoing credit crunch, compounded by consumers not willing to spend, any medium term progress will be muted!

The USD$ currently is lower against the EUR +0.18%, CHF +0.14%, JPY +0.07% and higher against GBP -0.49%. The commodity currencies are stronger this morning, CAD +0.30% and AUD +0.16%. The loonie continues to take its cue from a floundering greenback, yesterday it managed to print a 7-month high and ended close to unchanged on the day, despite global equities and commodities taking it on the chin. It not fundamental data rather the demise of the greenback vs. its major trading partners that has been deciding the fate of the loonie of late. The recent advance has been swift and violent. The higher yielding currencies are back in vogue, with some commodities making them even more enticing. The longer term fundamentals certainly support a much stronger CAD, but perhaps global fear that the US will be lose its AAA rating has investors selling all US denominated asset classes. For the time being, the trend is your friend, look to own CAD on any USD rallies.

The AUD advanced vs. the US currency as ‘gold’, the countries 3rd most-valuable export, climbed to the highest level in over 2-months. The yellow metal has advanced 7% this month. So far, month end requirements and carry trades have dragged the currency higher. For now, investors remain happy to buy some AUD on pull backs (0.7806).

Crude is higher in the O/N session ($61.66 up +61c). Yesterday, Oil fell from its 6-month highs as the Fed said that the recovery may ‘fail to take root’ in the US any time soon. In this week’s Fed minutes, they stated that they continue to see’ significant downside risks’. This has forced speculators to pare some of their profitable positions in both equities and commodities and by default pressurize the black stuff. The Global demand scenario has not warranted such an aggressive run up, demand destruction remains robust. Despite all this, this week’s EIA report showed that US inventories declined more than forecasted. Stocks dropped -2.11m barrels to +368.5m last week vs. an anticipated decline of -0.4k, w/w. Even more eye popping (just ahead of US memorial holiday which is the bench-mark for the beginning of the US driving season), gas supplies plunged -4.34m barrels to +204m-this decline was 3-times more than expected! Refineries are operating at +81.8% of capacity, which is down -1.9%, w/w and is the lowest utilization rate in a month and a half. One can conclude that refineries are nervous about increasing production as global demand remains weak. The 4-week monthly demand is averaging at +18.3m barrels a day, that’s down 8% y/y. OPEC, is unlikely to reduce output at next weeks meeting in Vienna. If anything, these elevated prices will likely encourage some members to increase production once again! With the greenback under continued pressure Gold rose to its highest level in 2-months as the currency value boosted the purchase of the yellow metal as an alternative investment ($951). Some technical analysts are predicting that the commodity could breach its all time highs sooner rather than later!

The Nikkei closed 9,225 down -38. The DAX index in Europe was at 4,940 up +40; the FTSE (UK) currently is 4,369 up +23. The early call for the open of key US indices is higher. The 10-year Treasury backed up 15bp yesterday (3.34%) and is little changed in the O/N session. Once dealers were done making the Fed pay up for yesterday’s buy-back, they then turned around and aggressively cheapened the curve for next week’s $101b issue by the US Treasury (2’s-$40b, 5’s-$35b and 7’s-$26b). The Fed only purchased 16% of certain issues that were offered to them, it had been averaging around 30%. Perhaps, it was an underhanded way for the Fed to rap dealer’s knuckles for reading too much into their buy-back program that was mentioned in this weeks Fed minutes. Expensive for the dealer, but cheaper for the Fed!

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